Globalization: An Economic Perspective

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Table of Contents

Introduction
The Concept of Globalization
Causes of Globalization
Critique of Globalization
Trade and Redistribution
Income Inequality
Positive Effects of Globalization
Conclusion
Bibliography
Footnotes

Introduction

Globalization is a hotly debated phenomenon associated with a slew of theories purporting to account for its adverse, negligent, or beneficial effects on a wide range of topics such as earnings inequality, standards of living, environment, cultures, societies, job security, and domestic production potential among others. Globalization refers to the tendency of capital, goods, services, workers, innovations, and information to move across borders, thereby increasing levels of integration in the world and changing patterns of economic growth. Unfortunately, people’s understanding of the link between the trend and many aspects associated with it is still highly partial.

Therefore, both the resistance and championing of globalization has taken shape at cultural and governmental levels. In the late 1980s, many Americans were extremely optimistic about the phenomenon.¹ However, in the early 1990s, when the World Trade Organization was established in an attempt to facilitate economic liberalization, the anti-globalization movement emerged.²

Those who oppose globalization often complain about the widening economic gap between countries, rampant materialism, deterioration of democracy, job losses, and unfair working conditions among others.³ Proponents of globalization argue that its benefits include, but are not limited to, increased competition, lowering consumer prices, economic growth, the proliferation of democracy, cultural enrichment, technological advancement, and dissemination of information.⁴

This paper aims to explore numerous characteristics of globalization, its points of contestation, and acclaim. The paper attempts to show that both drawbacks and benefits of the international flow of knowledge, investment funds, and labor depend on what aspects of the phenomenon are examined.

The Concept of Globalization

Given the vague status of the term globalization, it is necessary to define what it is and what it is not before proceeding with the exploration of the phenomenon. The term, which was popularized by Levitt in 1983, should not be confused with the concept of globalism that refers to “aspirations for an end state of affairs wherein values are shared by or about all the world’s five billion people.”⁵ Neither does globalization describe the world in which states engage in interaction with each other without losing their autonomy. For example, the existence of the European Union, which is a supranational project, requires the partial dissolution of autonomy of its member states; therefore, the union exhibits characteristics of both internationalization and denationalization.⁶

It means that globalization is not a project that seeks to dismantle the nation-state system. Also, the creation of a supra-national government cannot be considered a part of the process commonly referred to as globalization. Finally, the global development, which has been instigated by the policies aimed at the deregulation of financial transactions as well as the elimination of some restrictions on international trade, does not aim at equitable dissemination of its costs and benefits among participating parties. After all, free trade cannot be equated with fair trade.⁷ It is hard to deny that this point automatically renders some criticism of globalization invalid.

It can be established with a high level of certainty that globalization is a transformational process. Furthermore, this process is closely linked with the concepts of internationalization and regionalization. The most interesting part of this connection is that strengthening of national activities on both international and regional levels can result in the promotion of globalization. It has to do with the fact that internationalization and regionalization “facilitate a decoupling from the national arena.”⁸ Therefore, it can be argued that globalization is an inevitable feature of the modern world.

Causes of Globalization

After having established what globalization is, it is necessary to consider its key causes. The following factors have often been named as major contributors to the promotion of globalization: neoliberalism, financial liberalization, liberalization of capital transactions, the New Industrial Revolution, and the collapse of the Soviet Union.⁹ Neoliberalism has been pointed to as the main factor responsible for the evolution of globalization. The concept refers to the deliberate attempt of governments to liberalize capital movement, reduce spending, and promote laissez-faire economics. The movement aims to eliminate government interference with the market and opposes discretionary economic policies.

Also, distinguished scholars of neoliberalism such as Hayek and Friedman have wanted to get rid of as many regulations as possible, thereby showing their respect for individual freedom.¹⁰ Both Thatcher and Reagan have shown their support for what they have considered being a social philosophy, thereby helping neoliberalism to enter mainstream economic thought. Financial liberalization, the aim of which is to dismantle international regulation has helped to “widen the scope for procurement of capital and investment.”¹¹ Financial liberalization activities have resulted in the dilution of the Glass-Steagall Act. Furthermore, the movement has led to the emergence of hedge funds and private equity funds as well as a dramatic increase in the use of securities.

Liberalization of capital transactions is a movement that was initiated by the International Monetary Fund (IMF) in the 1990s after the collapse of the Breton Woods system.¹² Through foreign direct investment, the movement has stimulated economic development in Brazil and India. It should be mentioned that liberalized capital markets can result in numerous inefficiencies stemming from asymmetric information problems. The New Industrial Revolution is another cause of globalization. The revolution started in the 1980s with the creation of the IT industry.¹³ The rapid growth of the industry has offered unique possibilities for outsourcing. The collapse of the Soviet Union was another major stimulus for the evolution of globalization.

Critique of Globalization

It is beyond the scope of this paper to take an integrated approach to analyze globalization. Therefore, while discussing the points of contention with globalization, it is necessary to omit the social and environmental implications of the process and instead focus on foreign trade and income inequality that often results in the emergence of political conflict and populist backlash.

Trade and Redistribution

The contentious nature of globalization stems from its redistributive implications.¹⁴ The Stolper-Samuelson theorem, which stipulates that under the conditions of free-trade, in an economy with two products and two factors of production, a factor used for the production of importable goodwill inevitably undergoes a reduction of its earnings.¹⁵ Therefore, to anyone familiar with the theory, it is clear that under competitive conditions, trade liberalization always results in losses of varying magnitude. Furthermore, when it comes to the magnitude of the redistributive effects of the liberalization of trade, it always increases with the dissolution of trade barriers, thereby leading to smaller efficiency gains.

The distributional predictions of the Stolper-Samuelson theorem can be evidenced in the consequences of the North American Free Trade Agreement (NAFTA) for the US labor markets. Hakobyan and McLaren, who have measured the effects of the agreement by analyzing industry-specific census data, argue that American regions without tariff protection have experienced a steeper decline in wages than those localities that have been protected by tariffs.¹⁶ Furthermore, the authors point to the fact that unskilled workers have suffered the most—the growth of their wages has reduced by 8 percent.¹⁷ When it comes to the industry effect of the agreement, unprotected industries exposed to the trade with Mexico have contracted by 17 percent. ¹⁸

Trade-poverty nexus has often been presented by opponents of globalization. This connection can be subdivided into three major components: trade-induced growth, trade-induce shifts in prices and income, and trade-induced patterns of employment.¹⁹ There is no disputing the fact that open markets facilitate the spread of information, new technologies, and capital goods, which results in the emergence of the economies of scale and increased competitiveness. As a result of the more effective distribution of resources, poverty in urban areas tends to increase. Castilho, Menendez, and Sztulman who have looked at the effects of agricultural trade across Brazilian states in the period from 1987 to 2005 argue that trade liberalization favors the growth in poverty in rural areas.²⁰ Furthermore, the authors argue that the ever-increasing integration of Brazilian states into world markets has resulted in the rise in poverty levels.²¹

Income Inequality

A cross-country comparison of income inequality performed with the help of Gini indices shows that globalization has resulted in substantial income differences on both regional and country levels. According to Jaumotte, Lall, and Papageorgiou, “while inequality has risen in developing Asia, emerging Europe, Latin America, the Newly Industrialized Economies, and the advanced economies over the past two decades, it has declined in some sub-Saharan African countries.”²² The authors state that among the largest world’s economies, income inequality has declined only in France, whereas India and China have experienced a sharp increase in the disparities of the income distribution.²³ It means that during the recent phases of globalization, most countries have witnessed a widening gap between the incomes of their citizens.

Positive Effects of Globalization

Proponents of globalization argue that even though the process has not helped to eliminate the problem of income inequality in the developed nations, it has succeeded in reducing income discrepancies between citizens of the developing nations. Globalization has facilitated foreign direct investment (FDI), thereby shifting the pattern of the income distribution among different economies. Numerous studies point to the fact that increasing flows of FDI into nations such as India and China have led to the reduction of inequality gaps in terms of income.²⁴ It has to do with the fact that FDI flows lead to “a general rise in the capital quantity in the developing countries, which subsequently means that the marginal physical product of labor increases” thereby raising both real and nominal wages.²⁵

Another point habitually discussed by proponents of globalization is the decrease in the number of people living below the poverty line. According to Sang-Hyup, who investigated the economic benefits of globalization, there has been a reduction of people living on less than $1.25 per day in the period from 1980 to 2005.²⁶ Furthermore, the developing countries have experienced steeper GDP growth rates than the developed countries since 1996.²⁷ Therefore, it can be argued that despite substantial differences in sizes of economies between countries affected by globalization, more parties have partaken in the benefits of the process than those that have only experienced its costs. Also, the reduction in global poverty levels suggests that globalization has been a positive force in the lives of extremely poor people in the world.

The promotion of economic growth is another positive effect of globalization. A study on the economic development of the Organization of Islamic Cooperation (OIC) shows that globalization has a positive net effect on growth.²⁸ The authors of the study attribute this effect of globalization to the increase in the size of global markets as well as a more efficient allocation of resources that allows OIC countries to specialize in economic activities in which they have a comparative advantage.²⁹

Moreover, the researchers claim that a rapid spread of knowledge has led to increased productivity and technological innovation.³⁰ It can be argued that the implementation of new technological solutions requires higher levels of spending in the development of human capital, which directly promotes economic growth. Also, the information and financial openness inevitably lead to the creation of stronger financial systems that allow developing countries to benefit from globalization.

Greater mobility of capital, information, workers, goods, and services is linked by proponents of the phenomenon with a positive effect on human well-being. The multi-dimensional effects of globalization in the period from 1970 to 2010 have been explored by Mukherjee and Krieckhaus ³¹who argue that “on balance, all forms of globalization positively affect well-being.” Similarly to other proponents of globalization, the authors claim that international treaties lead to the reduction of a conflict whose negative effects diminish human well-being.³²

Furthermore, Mukherjee and Krieckhaus espouse the belief that the IMF and World Bank are not responsible for the poor economic performance of the countries that have been influenced by these international bodies.³³ It is hard to disagree with authors in that the existence of international programs such as the United Nations Development Program (UNDP) and the United Nations Children’s Fund (UNICEF) helps to decrease the amount of misery in the world, thereby improving human well-being.

Conclusion

Globalization is a process that attracts extremely contradictory perspectives. The discussion of the benefits of globalization in this paper has not been sidetracked by the analysis of extremely important but non-economic issues such as climate change, cultural appropriation, and human rights. Instead, the paper has focused on the reshaping of the patterns of global trade, income inequality, economic growth, and poverty.

It can be argued that despite a great deal of emphasis on the unequal distribution of benefits of globalization among participating parties that is often pointed to as a major drawback of the phenomenon by its opponents, the reduction in the prices of goods have benefited consumers across the world. However, it is impossible to deny that during the recent phases of globalization, most developed countries have experienced a widening gap between the incomes of their citizens. This is a negative effect of globalization, which has to be taken into account when assessing the impact of the process on the world economy.

Taking into consideration the fact that globalization is associated with economic growth, it can be argued that it improves the global economy. Furthermore, the process has facilitated the movement of labor across state borders, thereby helping workers to sell their skills in the areas of the world, which are the most appreciative of them. Other positive effects of globalization include, but are not limited to, increased competition, the proliferation of democracy, cultural enrichment, and dissemination of information. However, given many negative factors associated with the phenomenon, it can be concluded that globalization has both positive and negative effects on the world’s economy.

Bibliography

Castilho Marta, Marta Menéndez, and Aude Sztulman “Trade Liberalization, Inequality, and Poverty in Brazilian States” World Development, August 2^nd, 2012, pp. 821–835.

De la Dehesa Guillermo, What do we Know About Globalization: Issues of Poverty and Income Distribution, Carlton, 2007, pp. 112-115.

Dignam Alan and Michel Galanis, The Globalization of Corporate Governance, London, 2009, p. 90.

Ekmekcioglu Ercan “The Effects of Globalization on World Income Inequality” International Journal of Academic Research in Business and Social Sciences, April 13^th, 2012, pp. 140-145.

Hany Makhlouf “Facets of Globalization” International Journal of Business and Social Science, January 2^nd, 2014, pp. 59-64.

Hirai Toshiaki, Capitalism and the World Economy: The Light and Shadow of Globalization, Abington, 2015, p. 9.

Hirst Paul, Grahame Thompson, and Simon Bromley, Globalization in Question, Cambridge, 2009, pp. 24-27.

Jaumotte Florence, Subir Lall, and Chris Papageorgiou “Rising Income Inequality: Technology, or Trade and Financial Globalization?” IMF Economic Review, May 21^st, 2013, pp. 271-309.

Mukherjee Nisha and Jonathan Krieckhaus “Globalization and Human Well-Being” International Political Science Review, June 12^th, 2011, pp. 150-170.

“Pros and Cons of Globalization” InternationalRelations. Web.

Samimi Parisa and Hashem Jenatabadi “Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities” PLOS, April 10^th, 2014, 70-94.

Sang-Hyup Shin “A Study on the Economic Benefits of Globalization: Focusing on the Poverty and Inequality Between the Rich and the Poor” International Area Review, September 15^th, 2009, pp. 191-214.

Seay W. “The Birth of the World Economy and Finance.” Econ 491: Virginia Commonwealth University, Summer 2017.

Shushanik Hakobyan and John McLaren “Looking for Local Labor Market Effects of NAFTA” Review of Economics and Statistics, October 16^th, 2016, pp. 728–741.

Willarts Barbara, Alberto Garrido, and Ramon Liamas, Water for Food Security and Well-Being in Latin America and the Caribean: Social and Environmental Implications for a Globalized Economy, Oxon, 2014, p. 121-124.

Footnotes

“Pros and Cons of Globalization” international relations. Web.
Ibid.
Ibid.
Ibid.
Alan Dignam and Michel Galanis, The Globalization of Corporate Governance, London, 2009, p. 90.
Ibid.
W.Seay. “The Birth of the World Economy and Finance.” Econ 491: Virginia Commonwealth University, Summer 2017.
Alan Dignam and Michel Galanis, The Globalization of Corporate, p. xiv.
Toshiaki Hirai, Capitalism and the World Economy: The Light and Shadow of Globalization, Abington, 2015, p. 9.
Ibid.
Toshiaki Hirai, Capitalism, p. 9.
Guillermo de la Dehesa, What do we Know About Globalization: Issues of Poverty and Income Distribution, Carlton, 2007, pp. 112-115.
Ibid.
Guillermo de la Dehesa, What do we Know, pp. 112-115.
Paul Hirst, Grahame Thompson, and Simon Bromley, Globalization in Question, Cambridge, 2009, pp. 24-27.
Hakobyan Shushanik and John McLaren “Looking for Local Labor Market Effects of NAFTA” Review of Economics and Statistics, October 16^th, 2016, pp. 728–741.
Ibid.
Ibid.
Barbara Willards, Alberto Garrido, and Ramon Llamas, Water for Food Security and Well-Being in Latin America and the Caribean: Social and Environmental Implications for a Globalized Economy, Oxon, 2014, p. 121-124.
Marta Castilho, Marta Menéndez, and Aude Sztulman “Trade Liberalization, Inequality, and Poverty in the Brazilian States” World Development, August 2^nd, 2012, pp. 821–835.
Ibid.
Florence Jaumotte, Subir Lall, and Chris Papageorgiou “Rising Income Inequality: Technology, or Trade and Financial Globalization?” IMF Economic Review, May 21^st, 2013, pp. 271-309.
Florence Jaumotte, Subir Lall, and Chris Papageorgiou “Rising Income Inequality,” pp. 271-309.
Ercan Ekmekcioglu “The Effects of Globalization on World Income Inequality” International Journal of Academic Research in Business and Social Sciences, April 13^th, 2012, pp. 140-145.
Ibid.
Shin Sang-Hyup “A Study on the Economic Benefits of Globalization: Focusing on the Poverty and Inequality Between the Rich and the Poor” International Area Review, September 15^th, 2009, pp. 191-214.
Ibid.
Parisa Samimi and Hashem Jenatabadi “Globalization and Economic Growth: Empirical Evidence on the Role of Complementarities” PLOS, April 10^th, 2014, 70-94.
Ibid.
Ibid.
Nisha Mukherjee and Jonathan Krieckhaus “Globalization and Human Well-Being” International Political Science Review, June 12^th, 2011, pp. 150-170.
Ibid., 156.
Nisha Mukherjee and Jonathan Krieckhaus “Globalization,” pp. 150-170.

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